Are You Confused By Basic Mortgage Terms? Check This Guide
As more than 20 million people in the United Kingdom hold a mortgage, you would be forgiven for thinking that these people understand their mortgage. Your mortgage is likely to be the most important agreement you have in life, but a recent study by firstmortgage.co.uk suggests many people are unaware of many key issues in their mortgage.
Are you comfortable with mortgage terms?
The study finds two-thirds of respondents are confused by what their deposit is, and that 70% of respondents are unsure of what the annual percentage rate (APR) is.
The following definitions should help.
Mortgage Deposit: The deposit is a lump sum that you pay at the point of buying the property. This payment allows you to own part of the property outright. The rest of the agreed price is paid by a mortgage, which is a loan paid in instalments.
Your deposit provides the lender with confidence that you are serious about buying the property.
APR: The APR refers to the annual rate of interest which is charged to borrowers. The APR is expressed as a percentage which represents the annual cost of these funds over the term of the loan. The APR includes fees or additional costs.
Do you know what you are paying each month?
The study also found that over half of mortgage holders are unsure of what a fixed rate mortgage is and 64% of people didn’t know what was meant by the term re-mortgage.
The following definitions will hopefully be of benefit.
Fixed-Rate Mortgage: A fixed-rate mortgage is one where the interest rate is fixed for a specified term of the loan.
This style of loan is popular for people who want to know how much they will pay each month. If interest rates rise, a homeowner can benefit from holding a fixed-rate mortgage, while if interest rates fall, a homeowner can lose out from holding this style of mortgage.
Re-Mortgage: A remortgage is when you pay of an existing loan or mortgage, with the proceeds of a new mortgage. The same property is used for the new mortgage as was used for the previous mortgage.
It appears as though people are aware of their lack of knowledge in this area. 64% of respondents said it would have been useful if they learned about mortgages before they applied for one. One-third of respondents said they only carry out “a little bit of research” before applying for a mortgage.
David McGrail of firstmortgage.co.uk spoke about the dangers of applicants arranging a mortgage without full knowledge of what a mortgage is, or what it entails. David said; “Understanding exactly what is and isn’t a part of a mortgage is crucial when applying for a mortgage. People should know what mortgage they are getting, how and when this might change and how much they could be repaying a month. For example, a variable rate mortgage would change in line with interest rates, while a fixed rate mortgage wouldn’t. Knowing what type is best for you is vital.”
McGrail also said; “There are so many types of mortgages, whilst the two main mortgage products are considered to be fixed rate and variable rate, there are numerous others such as offset mortgages, tracker mortgages or interest only mortgages, that might be right for some people. I would strongly encourage people to do their research and reach out to an adviser to discuss potential options before applying.”
While there are new challenges to overcome in the housing market, people shouldn’t consider arranging a mortgage to be an impossible task. However, it is vital people accept help and assistance from professionals in the field. If you are keen to arrange a mortgage, speak to a mortgage broker or experienced adviser and make sure you are fully equipped to make an informed decision.